View from the Arch #17 | Feb 23

Ethereum, Nvidia's Earnings, and Capital One's purchase of Discover… lot’s to cover this week!

This Week in Crypto

I know we do this every week, and we probably will for the foreseeable future too - but here is the latest data on ETF flows. We’ve seen a net outflow for the first time this month. (Note the 0.0 on Monday was due to a bank holiday in the US.)

If you read last week’s edition, we highlighted how the Ethereum trade will be gathering mindshare now, and that has absolutely played out this week with ETHBTC +5%. We believe this is a bullish trade going into May (given ETF expectations).

• A16Z has invested $100m (the whole round) into Eigenlayer - an Ethereum restaking protocol. This will add fuel to what was already one of the most anticipated protocol (and airdrop) launches of 2024. If you’re wondering what Eigenlayer is, this is a handy analogy:

• In all seriousness, this thread is a good explainer.

• Babylon, who raised $18m, is introducing Bitcoin as a trusted security backbone for PoS systems that can not only generate yields, but also foster integrated, secure, and decentralized economies of scale. 

  • Babylon’s Bitcoin Staking protocol allows Proof-of-Stake (“PoS”) systems such as PoS chains, L2s, Data Availability (DA) layers to acquire staking capital natively from Bitcoin.

  • Through its modular design and slashing functionality, Babylon’s Bitcoin Staking Protocol will enable PoS systems to introduce bitcoin as a staking asset and enjoy higher crypto-economic security than what native tokens can provide.

  • We recommend you checkout the testnet, where you can earn NFTs.

And finally, a smattering of news/reading that caught our eye this week:

• Arthur is back with his biweekly blog. This week he gives insights into his frameworks for thinking about his fund’s hurdle rates and shitcoin allocations. As always, it’s superbly written, but take his thoughts with a grain of salt as he is of course talking his book. It’s important to pay attention to the narratives he’s fostering as Arthur’s been around the crypto block and has a history of front-running market trends.

• A Uniswap governance proposal was made that aims to create a fee mechanism that rewards token holders who have staked their tokens went live, triggering a dramatic price rise. Could this act as a catalyst for an OG DeFi revival? Keep an eye out.

• Pudgy Penguins announces its expansion into Walmart stores. Pudgy Penguins briefly flipped BAYC as the #1 NFT collection this week.

• Circle is discontinuing USDC on Tron - Tron is one of the most popular chains for stablecoins, particularly in the developing world, accounting for almost 50% of volumes in August 2023.

• The UK seeks to lock in new stablecoin rules within the next six months.

• One that amused us: the ECB getting community noted.

• For readers who acted on our previous advice to stake $TIA, you can claim your Alt-Layer airdrop now. It pays to be a reader, folks!

This Week in TradFi

Nvidia's earnings report delivered the most eagerly awaited corporate earnings report for many years. They have almost single-handedly been responsible for the market/tech rally since October and didn't disappoint with their Q4 2023 earnings.

• Nvidia beat expectations on the top line ($22.1B versus $20.4B expected, relative to $6B in Q4 a year earlier), with a 77% operating margin that’s expected to sustain throughout the year!

• Net income was $12.3B versus just $1.4B a year earlier! These results should be enough to sustain the risk rally through the rest of the quarter.

The AI boom pushed the S&P to fresh record highs (+1.4% on Thursday alone).

• European stock indices followed suit, while the Nikkei 225 finally banished its own 35-year equity market blues by printing a record-high.

Investors might be split on the big rates picture but the Fed isn't. The latest FOMC minutes highlighted the need for clear signs of disinflation before considering rate cuts.

• Last week's higher than expected CPI/PPI prints revealed pricing pressures still exist; whereas this week, the Conference Board's leading indicators registered a decline of -0.4% against expectations of -0.3%, highlighting macro uncertainty ahead.

• Rates maintained an inverted curve with the 10-year at 4.31% and the 2-year at 4.66%.

In the UK, the Governor of the BoE suggested that the 'very small recession' reported last week might already be over amid 'signs of an upturn', and that the inflation rate will likely hit the 2% target level by the spring before moving higher.

China slashed its loan prime rate (LPR), the rate used to price mortgages, by 25bps to 3.95% and introduced additional measures to provide credit to developers.

• It was the largest cut since the rate was introduced in 2019 - a sign that the government might finally be serious about boosting the ailing property market.

• Too little, too late (or better late than never) as markets barely reacted - a sign that confidence in the Chinese economy has all but slipped away. HSBC's Q4 profits declined by 80% to just $1B, reflecting a $3B impairment charge relating mostly to Chinese investments. 

While the global macro has uncertainty, Nvidia is putting the US equity markets on its shoulders and marching forward!

This Week in Tech

This week’s big news came out of the fintech sector when Capital One announced its intent to acquire Discover Financial for a whopping $35.3B. The deal, should it go through, would be one of the largest ever in the financial services sector.

• Capital One is the 9th largest bank in the US with ~$470B of assets.

• Discover Financial is the 27th largest bank in the US with ~$150B of assets.

• Both Capital One and Discover Financial are among the top 8 credit card issuers in the US, representing a combined ~$900B+ in annual purchasing volume.

On the surface, this may seem like a regular consolidation between banks, but the real gem of the acquisition is in Discover’s payment network.

• There are only 4 major payment networks in the US: Visa, Mastercard, AmEx, and Discover.

• Owning the network would essentially enable Capital One to be full-stack and have relationships with both the consumers and the merchants.

This is incredibly powerful, and the Holy Grail of any card-issuing company. Capital One will boost the Discover network by moving its debit card and credit card flows over the network, which in turn will increase merchant adoption of the Discover network. This allows it to better compete with fintechs like Block and Affirm, who have been trying to build relationships with both consumers and businesses in efforts to eventually skirt around the payment networks.

While this is a masterstroke by Capital One, we’ll have to see if it can pass all the bright-eyed regulators at the DOJ and OCC. Recent history has proven that mergers and acquisitions of this size have slim chances of going through. We will keep you all posted as this plays out.

As usual, below are some fundraising announcements, M&A, and tech personnel changes that caught our eye:

• Walmart acquires television company Vizio for a whopping $3.2B.

• PermitFlow, a company building software to streamline the construction permitting process, raised a $31M Series A led by Kleiner.

• Industrial automation startup Hadrian raised a $117M Series B in a mix of equity and debt.

• Clumio, a data backup and recovery provider, raised a $75M Series D led by Sutter Hill Ventures.

• Sequoia announced a new equity-free fellowship for open source developers.

Arch is building next-gen wealth management platform for individuals holding Alternative Assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services, powered by BitGo.

Disclaimer: None of the above is financial advice, seriously.|